The corporate equity puzzle

Arbeitspapier

Why don't non-financial companies in Europe issue more equity? Using experimental data on firms from Europe, this paper analyses how firms trade-off between debt and external equity financing. It finds that firms are willing to pay a substantial premium on debt when presented with an equity participation as an alternative. Companies are willing to pay an interest rate that is about 8.8pp higher than the cost of equity to obtain a loan instead of external equity. This preference for debt can be explained only partially by the more favourable tax treatment of debt, fear of loss of corporate control and positive growth expectations. This paper discusses what else may explain this striking aspect of firm behaviour in the EU.

Object Details

• ISBN: 978-92-861-3623-8
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: EIB Working Papers ; No. 2018/03

Classification and Topics

• Classification: Wirtschaft ; Firm Behavior: Empirical Analysis ; Capital Budgeting; Fixed Investment and Inventory Studies; Capacity ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance ; Behavioral Finance: General‡
• Subject: capital structure choice ; debt premium ; behavioural finance

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Brutscher, Philipp-Bastian ; Hols, Christopher
• Event: Veröffentlichung
• (who): European Investment Bank (EIB)
• (where): Luxembourg
• (when): 2018

Further information

• DOI: doi:10.2867/878383
• Handle: http://hdl.handle.net/10419/180373
• Last update: 10.03.2025, 11:42 AM CET